Equal pay, TUPE and insolvency

24 January 2018

The issue for the Employment Appeal Tribunal (“EAT”) in a recent case was what happens to historic equal pay liabilities when claimant employees transfer under TUPE on to a new employer in the context of the transferor employer’s insolvency.

Facts of the case

The case concerned equal pay claims commenced in 2007 by a group of female employees against their then employer, Liverpool City Council. The women worked in local schools in catering roles and were paid less than their male comparators, despite being employed on work rated as equivalent. The Council had, however, pleaded “material factor” defences to justify the difference in pay.

The claimants’ employment transferred from the Council to Hopkinson Catering Ltd, and then within a short space of time to Duchy Catering Ltd. Duchy went into administration in early 2009, prior to the determination of the equal pay cases. The administrators then oversaw the sale of Duchy’s assets and the transfer of its employees (including the claimants) to Graysons Restaurants. The administration amounted to “relevant insolvency proceedings” for the purposes of regulation 8 of TUPE.

The effect of regulation 8 is to preserve the normal rights of transfer and protection under TUPE, save that not all of the transferor’s debts pass to the transferee. Instead, the employees have the right to claim certain debts from the National Insurance Fund (“NIF”), as though their employment had terminated, under the insolvency protection scheme in Employment Rights Act 1996 (“ERA”). This lists certain payments that are to be treated as “arrears of pay” and provides for up to eight weeks of pay arrears to be covered by the NIF where the employer becomes insolvent (subject to the statutory limit on a week’s pay).

The Employment Tribunal found that the claimants’ equal pay claims had not crystallised into an arrears of pay debt at the point the employees transferred from Duchy to Graysons, as those claims had not yet been determined. Further, even if the arrears were a debt, any liability in excess of the 8 week sum guaranteed by the NIF under the statutory protection scheme transferred to the transferee and was not extinguished.

What did the EAT decide?

On appeal, the EAT decided that liabilities arising from an equal pay claim can, in principle, be arrears of pay within the ERA insolvency protection scheme, even if those claims are undetermined. The claimants were employed on work rated as equivalent to their comparators, so there was a presumption that they would be entitled to equal pay unless that presumption could be rebutted through a successful “material factor” defence. As the claim related to work done prior to the insolvency, the EAT could see no clear conceptual difference between this and other analogous claims brought by employees who did not receive pay due under implied or disputed oral agreements for work done before the relevant date.

The Secretary of State would still need to be satisfied that the entitlement was properly due before making payment from the NIF, but effectively was in no different position to the transferee employer. The EAT also gave short shrift to arguments that the claimants could alternatively have brought their claims as damages, rather than debts. If equal pay arrears were “arrears of pay” they would necessarily be “debts” for the purposes of the ERA scheme.

Graysons argued that any balance of historic arrears in excess of the amount guaranteed by the NIF would not transfer to them under regulation 8 of TUPE, but only future payments arising as a result of the equality clause modification. The EAT rejected this, on the basis that the effect of regulation 8 was simply to remove sums payable to the employee under the statutory scheme from the remaining liabilities which transfer to the transferee. It did not extinguish those liabilities entirely, and the transferee would remain liable for any sums not payable out of the NIF under the ERA scheme. The ERA “rescue culture” was not intended to override or diminish employees’ rights to claim for historic debts, but rather to protect them and guarantee part payment of them from the public purse.

Implications

This ruling highlights the fact that transferee employers do not escape historic liabilities in the context of insolvency proceedings, save for those limited debts which fall to be paid by the NIF under the statutory scheme. This potentially leaves a transferee buyer in a rather vulnerable position, given they will not usually get any warranties and only limited information about transferring employees when buying a business in administration. The purchase price, on the other hand, will normally reflect these inherent risks.

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